Your goals could include repaying your mortgage early, buying a holiday home, paying for school and university fees or being able to retire when you want to. In addition, it’s important to have funds for emergencies to provide for unexpected expenses, such as a job loss or long-term illness.

Desired future lifestyle

Key to this is analysis based on your goals and desired future lifestyle. How much is enough money for every scenario? Can you afford to retire early and still live the life you want? What impact will choices made today have on your lifestyle in the future?

In order to develop your financial plan, you need clarity over your goals, your objectives and your motivations. Cashflow modelling illustrates what might happen to your finances in the future and enables you to plan to make the most of your money and aim to achieve your financial objectives.

Plan and review

With ongoing and regular planning, along with continued reviews based on your current lifestyle or any changes to your personal circumstances, cashflow modelling allows you to become and remain financially well organised and helps to determine your lifetime goals. It can allow you create a lifetime cashflow plan and help to plan and better control tax liabilities. It focuses on where your money needs to go to fulfil your future goals.

The process shows your current position relative to your preferred position and your goals by assessing your current and forecasted wealth, along with income inflows and expenditure outflows to create a picture of your finances, both now and in the future.

Your financial future

This detailed picture of your assets includes investments, debts, income and expenditure, which are projected forward, year by year, using calculated rates of growth, income, inflation, wage rises and interest rates.

In order to implement a detailed plan that outlines how to deliver your financial future, communication is vital. The process and planning are only as good and as comprehensive as the information provided.

Meet investment objectives

Cashflow modelling software helps you to visualise your financial future with easy-to-understand charts and graphs. It can provide an estimate on the growth rate you require to meet your investment objectives. This rate is then cross-referenced with your attitude to investment risk to assess whether your expectations are realistic and compatible with the asset allocation needed to target the necessary growth rate. This information can inform your decisions when identifying the best course of action as appropriate for your particular situation.

Money throughout life

Where cashflow modelling becomes particularly useful is the analysis of different scenarios based on decisions you may make – this could be lifestyle choices or perhaps investment decisions. By matching your present and expected future liabilities with your income and capital, recommendations can be made with the aim of you not running out of money during your life.

A snapshot in time is taken of your finances. The calculated rates of growth, income, tax and so on are used to form the basis of your cashflow modelling analysis. Therefore, regular reviews and reassessments are essential to ensure your goals remain on track.

A lifetime cashflow forecast enables you to:

• Produce a clear and detailed summary of your financial arrangements.
• Define your family’s version of the good life and begin working towards it.
• Work towards achieving and maintaining financial independence.
• Ensure adequate provision is made for the financial consequences of the death or disablement of you or your partner.
• Plan to minimise your tax liabilities.
• Produce an analysis of your personal expenditure planning assumptions, balancing your cash inflows and your desired cash outflows.
• Estimate future cashflow on realistic assumptions.
• Develop an investment strategy for your capital and surplus income in accordance with risk and return expectations, flexibility and accessibility with which you are comfortable.
• Become aware of the tax issues that are likely to arise on your own death and that of your partner.

Peace of mind

With every financial corner you turn, it is important to ‘run through the numbers,’ which will help you make the right financial decisions. It is important to be specific. For example, it is not enough to say, ‘I want to have enough to retire comfortably.’ You need to think realistically about how much you will need – the more specific you are, the easier it will be to produce a plan to achieve your goals.

If your needs are not accurately established, then the cashflow modelling forecast will not be seen as personal, and therefore you are unlikely to perceive value in it. Some years, there may not be any change, or just small tweaks. However, in other years, there may be something significant. Either way, you will need to ensure things are up to date in order to keep your own peace of mind knowing your plans are still on track.

Please note, The Financial Conduct Authority does not regulate advice on lifetime cash flow planning.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

FP2022-186